At Jesson & Rains, we review our estate planning clients’ assets and liabilities in order to provide them with a thorough consultation as to the treatment of their assets and liabilities upon death. However, most of what is reviewed and discussed rarely finds its way into their wills, or in their “probate estate” after death, because a lot of assets pass outside of the probate upon death.
First, some terminology: essentially everything a person owns when they die is included in their “estate,” including assets that pass outside of probate. For this purpose, we’ll change the term “estate” to “taxable estate” -- If the decedent’s total assets (including life insurance, retirement, property, etc.) are less than $5,450,000, the estate will not be saddled with an estate tax.
A lot of assets are not included in the “probate estate”. A decedent’s probate estate is simply all the assets the person has that do not pass directly to beneficiary or joint owner (oftentimes the spouse) at death. These probate assets are pooled together upon death to first pay costs associated with death, the administration of the estate, the decedent’s debts, and then distributed to his or her beneficiaries. The most important takeaway is that the probate estate is used to pay debts and costs. However, life insurance, retirement plans, securities, jointly owned property, and any other accounts with POD or TOD beneficiaries named are not included in this pot of probate assets (unless the decedent names the estate as the beneficiary).
Life insurance and retirement: These pass directly to the named beneficiary upon the decedent’s death and completely outside of the probate estate. They are free from the decedent’s creditors. If an estate is insolvent (meaning the decedent does not have enough money in the estate to pay the estate debts), the beneficiaries still get these monies, and the creditors are out of luck.
Securities and jointly owned property with right of survivorship: Securities automatically transfer to the named beneficiary (if there is one), and jointly owned property with right of survivorship (whether a bank account or a house) naturally belongs to the surviving owner(s) upon the other owner’s death. However, unlike the above category of assets, these assets can be taken by the estate in order to pay off the estate’s debts. This means that creditors can take money intended for a beneficiary, but only if there is no money remaining in the estate to pay the debts. This is a last resort. Thus, these assets initially pass outside of the probate estate but can be pulled back in if necessary. For jointly owned property, the creditors would only be entitled to half of the property (or 1/3 or ¼, depending on the number of joint owners). Determining whether or not your property is jointly owned with the right of survivorship is not always an easy task. See UNC School of Government's article on determining whether a right of survivorship exists here.
Tenants by Entirety Real Estate: Most spouses jointly own real estate in this fashion. Upon the first spouse’s death, the property automatically transfers to the surviving spouse, without going into the probate estate and free from the decedent’s creditors. However, the real estate is then singularly owned, and will be subject to distribution pursuant to the surviving spouse’s will through probate (and subject to the surviving spouse’s creditors if need be).
Finally, the attorneys at Jesson & Rains also examine other relevant documents when meeting with their estate planning clients. For example, a person may have other assets, such as an interest in a business, or may be the beneficiary of a trust. Most of the time, the documents themselves will state how the asset will be treated upon the decedent’s death. Sometimes, a decedent can leave these assets to a beneficiary in their will. For example, someone who is the beneficiary of trust proceeds may have a testamentary power of appointment, meaning that the beneficiary can state in his will who he would like to receive his trust shares after he dies. If the operating agreement does not state who will get the decedent’s business interest upon death, the will can take care of that as well.
As you can see, most individuals’ assets will pass outside of probate to their spouse or designated beneficiary. However, each client is different. Some have complex interests in various types of property, some own property singularly or are not married, some have a lot of debt that is cause for concern. Without a thorough consultation, your estate plan may not be complete. It is important for the attorney to get a complete picture in order to tailor your estate plan to your needs and wishes.
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